Friday, May 13, 2011

I spent a lot of time in this Crooked Timber comment thread discussing my previous two posts and the reactions to them. I think it's safe to say that I convinced exactly no one, and it's now devolved well past the original point of contention, so I want to clarify a few things and then I'm letting this go. I suspect that in terms of actual views of politics there’s less disagreement than first appears, but I could be wrong. The first point is related to the initial context of Krugman, and why I reacted the way I did to him. The other points are more general, and mostly refer to specific arguments brought up by commenters at CT. Drezner has additional thoughts. Phil Arena had a good post too. And Michael Flynn adds some important points. Dan Nexon jumps back in, and I agree completely with him that politics is almost entirely about rent-seeking and redistribution, but interest groups are part of the public and elite opinion is only one component of political competition. I expound on this below.

1. (NOTE: After I wrote this, but while Blogger was down so I couldn’t post it, Krugman himself took note, although he tries to rise above it by not offering comment. Too bad… he might’ve used the opportunity to express what it is, exactly, I’m “creatively misreading” by saying how much responsibility he believes the public bears. Since he says my accusation – that he’s trying to exculpate the public – is a misreading, I’ll take that to mean that he agrees that the public does deserve some blame. This makes his column, as written, very odd. It also makes many of the criticisms of me in the CT thread criticisms of Krugman as well. Anyway, I’m leaving this in the post because it gets at the reading I originally had, and the reasons I had it, which is the most interesting thing from the perspective of argument rather than piss-contest.) A lot of people think I misread Krugman, or was otherwise uncharitable. I was definitely uncharitable, because I have a pretty strong distaste for Krugman's predilection towards a "good vs evil" characterization of politics. CTers, who all seem to like Krugman quite a bit more than me, were much more charitable. That's fine with me. But I don't think I misread him. [Ed.: I accept that I did, now that he says I did. I stand by my general argument, which may be knocking down a straw man in Krugman's case, but as I learned at CT there are certainly others who hold a view close to this.] The point of his op-ed was to place responsibility for policy disasters on policy elites (at least the ones he disagrees with). To do that, he felt he needed to exculpate the public. So he argued that these were "top-down" policies, not "responses to public demand". Only once in his column (Greece) does he mention that the public had any role in this ("So who was to blame for these budget busters? It wasn't the man in the street")*. There wasn’t any sort of “and the public went along with it” or even “and the public was gullible enough to buy Dubya’s lies hook, line, and sinker” or anything like that. A lot of time in CT comments was spent dissecting exactly what was meant by "responses to public demand", and no agreement was reached, but my definition (and Drezner's) included "doing things that the public broadly supports so that you get elected". The modal CT commenter seemed to prefer a stricter definition of "demand", and perhaps a lot of our disagreement stems from that semantic question, but short of election results and polling data I'm not really sure what they could mean by that and none of them was able to say. Krugman’s “top-down policies” implies, to me, that the bottom-up public had nothing to do with it.

My argument against what Krugman is saying now is actually congruent with what Krugman has written previously. Not just on Medicare Part D, as Henry Farrell pointed out, but more generally. When it comes to enacting policies that Krugman prefers, he has no problem at all citing poll data or election results as evidence of public demand, so I remain unconvinced that I was misreading him [Ed.: Caveat above applies here too.]. To drive this point home, here's what Krugman wrote a few weeks ago:

Eventually, of course, America must choose between these differing visions [from competing elites]. And we have a way of doing that. It’s called democracy. ...

For what it’s worth, polls suggest that the public’s priorities are nothing like those embodied in the Republican budget. Large majorities support higher, not lower, taxes on the wealthy. Large majorities — including a majority of Republicans — also oppose major changes to Medicare. Of course, the poll that matters is the one on Election Day. But that’s all the more reason to make the 2012 election a clear choice between visions. ...

So let’s not be civil. Instead, let’s have a frank discussion of our differences. In particular, if Democrats believe that Republicans are talking cruel nonsense, they should say so — and take their case to the voters.

This is the same evidence -- polls and election results -- that Drezner and I cited when arguing that the macro polity supported Bush's policies while Krugman says they didn't (or didn't "demand" them). So Krugman is trying to have it both ways: public demand as measured by polls and elections matters when it agrees with him, but does not when it doesn't. If the Democrats take their case to the voters and win, Krugman will claim a public mandate; If the Republicans win, he will claim elite manipulation by Very Serious People. How is this not a double-standard?

And I agree; let's not be civil. When an elite "pundit in good standing" plays intellectual three-card monty, let's call it what it is: "Unwisdom", to borrow Krugman's expression. Krugman is a partisan, and that's fine, but that shouldn't give him license to be this selective in evidence.

2. I very much believe that elites (and interest groups) play a huge role in creating policy, particularly in the details (i.e. where the devil is). In fact, the conclusion of my post previous to the one that started all this was:

It's no secret that investors will try to move markets in ways that are advantageous to them, nor that political elites will try to turn public opinion through the media. But in this case basically everyone agrees that Greece is insolvent, and that some form of restructuring is all but inevitable. That doesn't mean that the terms of that restructuring, nor the political implications for the eurozone, are assured. These might be examples of certain investors, government officials, or policy entrepreneurs [trying] to influence the timing of the restructuring, as well as the political response to it.

Elites matter, but within the context of public opinion plus institutional and other constraints. The relative weight of each of those -- public, elites, institutional constraints -- will vary by issue, but for high salience issues like tax policy and wars the public will play a large role in shaping the policy space.

One example (of several) I gave in comments at CT to illustrate this fact is that in addition to tax cuts that largely benefitted the wealthy, Bush also wanted to privatize Social Security. Many of the same elites that Krugman is attacking supported both policies. One of those became policy. The other didn't. Reference to "elites" in the way we've been discussing them doesn't tell us anything about why there were divergent outcomes in these cases. What we do know is that the public supported one, and not the other. Therefore, is it really so unreasonable to conclude that public opinion might be a relevant variable? And if it is, then shouldn't the public share some (not all) of the blame when things go wrong?

3. What we mean by "elites" isn't clear. As I pointed out in CT, and as Drezner mentioned too, by the definition Krugman uses -- "self-appointed wise men, officials, and pundits in good standing" -- Krugman himself qualifies as an elite. As does practically everyone else with a recognizable name. Elites often have different preferences, so ex post it will always be easy to find some that supported any particular policy, and then blame them for any bad outcomes following from it. While this might be cathartic, it doesn't help us understand which elites got their way and why. For example, many elites (including Greenspan and the whole Republican party) wanted the Bush tax cuts. Many others (including Krugman and the whole Democratic party) did not. If that's all we knew, and we start from the assumption that only elites matter, how could we understand outcomes? And if elites aren't the only thing that matters, why should they be the only ones to take the blame when things go wrong?

Similarly, the “public” does not refer to 100% of everyone. Krugman’s definition of an elite – “self-appointed wise men, officials, and pundits in good standing" – actually excludes the sort of interest groups that we generally think are involved in rent-seeking political behavior: industry groups (e.g. Wall Street), trade unions, religious organizations, farm associations, AARP, etc. According to Krugman’s definition, those would all be included in the “public” that had little-to-nothing to do with this. Instead, it’s all David Brooks’ fault.

The modal CT commenter surely thinks that the people who voted for George W. Bush made a big mistake, borne of ignorance, stupidity, or a view of politics that they completely disagree with. What’s wrong with saying that people who make mistakes deserve some portion of blame? (This is Krugman’s primary thesis, just applied to elites rather than voters.) If folks wish to exempt themselves from that slice of the public they are free to do so, without complaint from me. For my part, I never voted for Bush, actively campaigned against him in 2000 (I sat out 2004), and did not support any of the policies under discussion at the time they were put in place. So I’m more than happy to criticize those that did.

I didn’t highlight the role of interest groups within the public in my first post. That was a mistake. I think about politics is as interest group competition, and since (I believe) Krugman does too it didn’t occur to me that such a clarification was necessary. Sometimes interest groups coalesce around certain policies – tax cuts, wars – in sufficient numbers that referring to a macro polity as if it was unified makes sense (to me, at least), but that’s not to imply that interest groups are homogenous.

To reiterate and close: I'm fine with blaming elites for bad outcomes. I do it all the time. It's fun, they deserve a lot of scorn, and are rightly punished at the polls when they screw up. The thing I like most about Krugman, and basically the only constant thread in his popular writings from the 1990s until now, is that he's great at punching holes in bad numbers and illogic that pundits and politicians often use. But some blame is surely left over for an electorate that prefers low taxes and high spending, and rewards politicians that give them both, when those policies lead to a budget mess.

My next post will about something I really like about Krugman.

P.S. Farrell suggests I read Pepper Culpepper's book. It's been at the top of my Amazon wish list since I first heard of it (I believe via Farrell) six months or so ago. I hope to get to it later this summer. But as I understand it, the book is about "quiet politics", i.e. issues that the public knows and hears little or nothing about. I don't think that accurately characterizes the public debates over tax cuts, wars, or health care. (It probably does with regard to financial regulation, in the late-1990s and early-2000s at least.) Salience with the public is important, and these are the most salient issues in American politics. I'm not sure why we should expect case studies of some of the least salient issues (in other countries) to map on to this discussion very well. In fact, if David Soskice's blurb -- "Culpepper argues with detailed empirical plausibility that democracy can only impose change in technical policy debates if they are of high salience" -- is accurate, then if anything we should take the opposite view in these high salience cases. There's appears to be a huge generalizability problem. So while I'm willing to accept Farrell's chiding on how to do IPE better, we need to make sure that we're not going off too far in the other direction of extrapolating too much from limited cases.

*He doesn't mention Medicare Part D in his column, but does toss off "with few exceptions" which is possibly a reference to that, and as Farrell pointed out to me, Krugman mentions Part D in a separate blog post as being a response to public demand. The fact that he was this selective with his examples in his column indicates to me that a charitable reading isn't the right one. He's stacking the deck on purpose. And of course I think that the tax cuts, Iraq war, and euro-adoption are about as much "exceptions" as Part D. But I've already said that I'm not inclined to give Krugman a charitable reading, so YMMV, of course.

24
comments:

I think Krugman did an intellectual disservice by not quoting your posts on this blog as important entries in this debate.

It's a matter of courtesy that continues to elude him since he only seems to quote certain big-name bloggers by name. For instance, he referred to data I pointed out in Brad Setser's blog which Setser attributed to me...but I somehow was forgotten in Krugman's retelling. Snark directed at me I don't mind--if you dish it out, you should take it too. Lack of proper attribution, however, is unacceptable. Bad show, PK.

Though we may not always agree, I feel your pain as another IPE blogger slighted by Krugman. Again, I think raising the visibility of IPE with the general public is the important takeaway here.

You are being purposefully obtuse, and that will tend to account for the futility of a discussion, (the fact that the words dissembling and sophistry appear repeatedly over on the CT thread was probably not a coincidence).

If you were reaching for answers rather than rhetoric, you would've had to acknowledge that any exercise in (blame) attribution of policy (blunders) to underlying principals, the ostensible issue here, relates fundamentally to preconceptions about the respective roles and responsibilities of leaders and their flocks respectively. Needless to say, the distinctions cannot be described by the degree to which the respective groups are informed on the issues. Short of acknowledging that, you end up with the sort of pointless vacuity that occupied so much of that thread 'politicians are lying thieves', 'publics matter', etc.

In that vein, if you're going to fault the masses for anything, and I would, it certainly shouldn't be for the type policies undertaken by the state- these were enacted almost entirely the behest of the powerful and their mouthpieces, as the record will unambiguously reflect. It is rather the case that the publics bear culpability by consequence of a collective and near complete abdication of their responsibilities as citizens, (a deterioration excruciatingly well documented in the literature, e.g. lamenting the demise of civic participation).

Nature abhors a vacuum, and thus the natural consequence of this has been that the power of the modern day robber barons to shape policy and the course of events has gone from significant to borderline plutocratic. As manifestly corrupt as these people have been, as easy as it is to relate the vast majority of policy (and yet more importantly, policy paralysis) to special interests (with exception for occasional insincere and purposely ineffectual rhetoric and policy 'pandering'), no robber baron, nor unscrupulous politician or political aide is the villain of that story. The guilty party there can only be found in the mirror.

To be clear, this isn't to argue that publics only impact on policy is of the kind of purposely ineffectual 'temporarily repeal the gas tax'/'release oil from the SPR' type we often see to placate popular anger. This is the kind of strawman that you've been floating the whole way through and which any reasonable reading of Krugman will make clear has never been explicitly stated nor intimated.

Of course there is outrage when the economy goes into the tank, unemployment spikes and wages crater, or when inflation skyrockets, or when foreign affairs end ignominiously. But all these things tend to end in exactly the same way: the in-power party becomes the out-power party.

By definition, this dynamic does not leave any room for the 'policy preferences' of the electorate, even if I could be convinced that such things exist. Which at this point I cannot. Joe Voter may claim not to want tax increases or spending cuts and a balanced budget, but what he really wants is personal prosperity, (and to a lesser degree collective prosperity including e.g. security, national prestige, the orthogonal bit of right-track wrong-track, etc.), and his ultimate happiness will be determined accordingly, see e.g. approval rates, Clinton WJ and Reagan RW respectively.

This gets us to what I believe is the missing ingredient in your reading of Krugman, which is that the 'bottom-up' legitimacy of a policy is a matter of both stated preferences and the extent to the policy can be shown to further the afore mentioned ends of Joe Voter, not simply whether it can be sold to him as so doing. Call it the 'What's the matter with Kansas?' effect.

This is of course is fraught ground, but less so when you consider just how manifestly counter to those interests is policy such as that cited by Krugman. In any case, it is certainly no less fraught than the wholesale abstraction of stated preferences from the media, messaging, sophisticated public relations and (billions of dollars of) advertising context they arise out of.

Anyway, even if you don't agree with that framing, which would be a shame given its near self-evidence, I would hope at least that you would reconsider the idea that we can assign a coefficient of culpability to 'elites' and 'publics' by linear regression. That's just plain unworthy.

PS Your accounting of the financial crisis is the worst part of all this, which is saying something. It was in fact nothing to do with official housing policy (or very little) and everything to do with unofficial monetary policy of moral hazard effectuating, special interest serving speculator bailouts.

You mentioned the global nature of the fallout including over differing regulatory regimes. I'd suggest wrapping your mind around this simple and contemporary but highly telling flow chart before investing further in that Greenspanian talking point. If it still doesn't sink in, have a google for "Bretton Woods II". This is not the inconvenient factoid that Mr. Greenspan might hope it was. Quite the opposite.

Meanwhile, and more to the point, I would have a think about familiarizing yourself with the work of Hyman Minsky in general and his Financial Instability Hypothesis in specific. All questions, or at least all the big ones, are answered therein.

Speaking of which, I recently had a quite relevant to this particular issue exchange with an economist on an aspiring economist's blog: http://noahpinionblog.blogspot.com/2011/04/what-i-learned-in-econ-grad-school.html. Wouldn't be the worst place to start. And, as ever, you could do a lot worse by way of prescience and eloquence than Mr. Gall: http://www.normangall.com/brazil_art6eng2.htm & http://www.normangall.com/brazil_art6eng.htm

You are being purposefully obtuse, and that will tend to account for the futility of a discussion, (the fact that the words dissembling and sophistry appear repeatedly over on the CT thread was probably not a coincidence).

If you were reaching for answers rather than rhetoric, you would've had to acknowledge that any exercise in (blame) attribution of policy (blunders) to underlying principals, the ostensible issue here, relates fundamentally to preconceptions about the respective roles and responsibilities of leaders and their flocks respectively. Needless to say, the distinctions cannot be described by the degree to which the respective groups are informed on the issues. Short of acknowledging that, you end up with the sort of pointless vacuity that occupied so much of that thread 'politicians are lying thieves', 'publics matter', etc.

In that vein, if you're going to fault the masses for anything, and I would, it certainly shouldn't be for the type policies undertaken by the state- these were enacted almost entirely the behest of the powerful and their mouthpieces, as the record will unambiguously reflect. It is rather the case that the publics bear culpability by consequence of a collective and near complete abdication of their responsibilities as citizens, (a deterioration excruciatingly well documented in the literature, e.g. lamenting the demise of civic participation).

Nature abhors a vacuum, and thus the natural consequence of this has been that the power of the modern day robber barons to shape policy and the course of events has gone from significant to borderline plutocratic. As manifestly corrupt as these people have been, as easy as it is to relate the vast majority of policy (and yet more importantly, policy paralysis) to special interests (with exception for occasional insincere and purposely ineffectual rhetoric and policy 'pandering'), no robber baron, nor unscrupulous politician or political aide is the villain of that story. The guilty party there can only be found in the mirror.

To be clear, this isn't to argue that publics only impact on policy is of the kind of purposely ineffectual 'temporarily repeal the gas tax'/'release oil from the SPR' type we often see to placate popular anger. This is the kind of strawman that you've been floating the whole way through and which any reasonable reading of Krugman will make clear has never been explicitly stated nor intimated.

Of course there is outrage when the economy goes into the tank, unemployment spikes and wages crater, or when inflation skyrockets, or when foreign affairs end ignominiously. But all these things tend to end in exactly the same way: the in-power party becomes the out-power party.

By definition, this dynamic does not leave any room for the 'policy preferences' of the electorate, even if I could be convinced that such things exist. Which at this point I cannot. Joe Voter may claim not to want tax increases or spending cuts and a balanced budget, but what he really wants is personal prosperity, (and to a lesser degree collective prosperity including e.g. security, national prestige, the orthogonal bit of right-track wrong-track, etc.), and his ultimate happiness will be determined accordingly, see e.g. approval rates, Clinton WJ and Reagan RW respectively.

1. I'm not being purposefully obtuse. If I'm being obtuse, it's unintentional.

2. You can think what you like about citizens' abdications; I just think people like low taxes and high spending. Sometimes, they like blowing up foreigners too.

3. "What's the Matter with Kansas?" is crap. The only political scientist that Krugman appears to have read -- Larry Bartels -- smacked it down good and hard.

http://www.princeton.edu/~bartels/kansas.pdf

4. I never abdicated the elites. I always reserved the greatest share of blame for them. And I don't know why you think there can't be an additive relationship b/t elites and publics in shaping policy. And if it's multiplicative, then my point would seemingly be stronger.

5. I think I agree with you about the structural nature of the financial crisis, but then I'm not entirely sure what you're saying.

6. My research is partially on hidden moral hazard in the banking sector, so I don't need much convincing. But, while not part of my research, housing policy played a role too. As did other policies that exacerbated macro imbalances.

7. I've got nothing against Minsky. But he can't tell us why the dot-com bubble had little effect on the real economy, while the housing bubble had a catastrophic effect. That seems like a pretty big question, so no... I'm afraid he doesn't get us everywhere we want to go.

Fine. But, If you're not being purposefully obtuse, I'd love it if you'd explain to me what your response 2 is meant to mean. Is this just one of those difference of opinions things? If that's the case, you have me wondering if you're in the wrong field.

Or could it be that I'm just a silly neophyte for raising civic responsibility and linking it to the degree to which the elite are accountable to the governed? I assume that goes for this guy as well: http://canonsociaalwerk.be/1995_Putnam/1995,%20Putnam,%20bowling%20alone.pdf

Relatedly, one wonders why Putnam didn't just deplane in Italy, assume away the possibility that the different outcomes observed in local governments around the country could be anything but the consequence of differing preferences, and pop on back over the pond. Would've made for a less interesting book I guess, but much more time for blogging!

As to 'What's a Matter With Kansas' I don't actually care what Krugman or whomever he reads has to say about it. The point which I don't believe is controversial is that people have been known to vote against their interest since a few hundred generations before Robert Penn Warren. Furthermore, whether or not that is controversial is immaterial, as I am asserting it on the basis of the current eye-watering level of corruption at all levels of government, and the (shocking when you stand back and just observe it) extent to which the political discourse ignores/countenances/excuses it.

4 lapses into the coefficient of culpability framing the entire thrust of my comment was to repudiate. Not much else to be said there.

On 5 you should know that I do answer requests for clarifications, however, I do need to know what needs clarifying. Not that I get the impression much link following was undertaken there in the first place, but whatever.

On 6, actually housing policy had no important effect on the crisis, except that it shaped an institutional landscape, in particular accounting for 'the agencies', whose role in the unprecedented and disastrous adventure in monetary policy that the Greenspan/Bernanke era has represented was profound, (essentially, the GSEs implicit government guarantee in the eyes most importantly by the foreign official sector gave them enormous quasi-QE power to backstop sliding markets. Have a quick look at the variation in the their balance sheet and 'book of business' growth rates over the last 20 years- in the Fed's own Z1 report no less. Pay particular attention to periods of broader financial duress. There's a pattern there, and it's not subtle.

7 The difference was the effect on the machinery of intermediation due to the wrecking of not just Wall Street institutions, but of the credibility of their businesses/products, notwithstanding the massive official subsidies that immediately rushed to their aid. It was furthermore a consequence of there being no entity remaining capable of the scale of leveraging required to take the burden off of the household sector, which was the role that the household (and to a smaller extent government) sector managed following the TMT/corporate investment bubble.

This, of course, was exacerbated by the even larger scale of leveraging now required to keep these speculators/intermediaries even nominally solvent, (eight years and a near doubling in non-financial credit later), such that 12% of GDP deficits not counting the massive and mounting future losses of our monetary authority.

You should know that Minsky foresaw these developments some 15 years ago in much of his commentary about the 'retrograde' evolution of the financial/monetary landscape of that time. Just for example, this is from 1993:

"The emergence of return and capital-gains-oriented block of managed money resulted in financial markets once again being a major influence in determining the performance of the economy. However, unlike the earlier epoch of finance capitalism, the emphasis was not upon the capital development of the economy but rather upon the quick turn of the speculator, upon trading profits... As managed money grew in relative importance, more and more of the market for financial instruments was characterized by position-taking by financial intermediaries. These positions were bank-financed. The main financial houses became highly-leveraged dealers in securities, beholden to banks for continued refinancing[**]. A peculiar regime emerged in which the main business in the financial markets became far removed from the financing of the capital development of the country. Furthermore, the main purpose of those who controlled corporations was no longer making profits from production and trade but rather to assure that the liabilities of the corporations were fully priced in the financial market...The question of whether a financial structure that commits a large part of cash flows to debt validation leads to a debacle such as took place between 1929 and 1933 is now an open question..." -my emphases-

**quaint sounding that, given it came before Glass Steagall's repeal, the mushrooming of derivative markets, the repo market Lehman helped to make famous, etc. etc.

All of which to say that, yes indeed, it is all right there, and any half-competent reading of the framework that was his legacy would grant that. Of course, the FIH is not model that would've spat out 'd-day 2008, Treasury Secretary Paulson investigates the Hoover strategy', or some otherwise specific GDP figure (not that such narrow 'thought' isn't what got us into this mess in the first place). Indeed, the fallout from the TMT/investment bust absolutely would 've had dire consequences but for the intervention of what Minsky termed Big Government and Big Bank. Suffice it to say, that is the whole point. Well, that and the fact that, until you actually read the man, I would suggest putting down the shovel.

#2 means exactly what it says: quite often, American voters prefer tax cuts and social services to no tax cuts and no social services. When we get frisky, we like to start wars, too. We'd prefer not to pay for any of it if it's all the same to you. Eventually, that combination leads to big deficits.

I have no idea what Bowling Alone has to do with anything. And, quite frankly, I wish Putnam would have just deplaned in Italy and written some blog posts. They probably would've been better than his book.

Fine if you don't care what anyone thinks about "Kansas"; I don't care what you think about it. I mean, for hell's sake the book was wrong about the *next two elections after it was published*. There's quite a lot of research explaining how and why people vote. Read Gelman's book if you like. Not theoretical at all, but for exhaustive descriptive stats of how people vote it's good enough. Better yet, read "The Macro Polity". Point is, a statement like "people have been known to vote against their interest" either has a very restrictive definition of "interest", or is just wrong on the facts.

On #4, you didn't repudiate anything, even if you meant to. I think that an equation is the perfect way to think about this.

5. I can't ask for clarifications, because I have no idea what you're talking about. You'd better start from scratch and write something coherent if you'd like me to understand. I think I know what "unofficial monetary policy of moral hazard" is, since I wrote my thesis on it, but other than that I'm not sure what you mean. It isn't a "Greenspanian talking point" that the crisis spread across different regulatory jurisdictions; it's a simple fact.

6. Um... that's what I was talking about, in addition to fiscal-side policies. I'd say they had a pretty important effect.

7. I would like for you to cite that Minsky bit. I don't see it in the "Financial Instability Hypothesis" paper, which was in '92, and the quote you give is all in the past tense, which would mean he didn't "foresee" anything at all.

We know from Kindleberger and Reinhardt/Rogoff that significant financial crises happen every 7 years or so, so something written about crises 18 years ago isn't especially impressive unless the details are spot on. They aren't.

In fact, Minsky got this crisis *wrong*. His argument in FIH is that crises occur when there is financial speculation (or Ponzi schemes) *instead of* hedging. To quote FIH: "It can be shown that if hedge financing dominates (the financial sector), then the economy may well be an equilibrium seeking and containing system".

This crisis occurred *despite* the fact that everyone was hedging, because they all miscalculated risk. Remember that all these instruments were securitized. Remember all the CDS designed to protect against default risk. These were hedging devices. This wasn't 1929. The speculators were in the *real* economy -- home buyers/flippers -- not the financial economy. The financial economy thought they were being safe, not speculating.

Here, literally, are Minksy's two FIH hypotheses: 1. The economy has some financing mechanisms that are stable, and some that are unstable; 2. Over time, instability will eventually occur.

The first one is true but trivial; the second is more obvious from Kindleberger than from Minsky.

On a cell phone without time for a more complete response now- forthcoming- but just to be clear, your interpretation of Minsky doesn't rise to the level of superficial understanding. It's just rank ignorance, now a part of the public record. I guess no one puts baby in the corner.

Speaking of which, you are aware that the 'hedging' instruments you cite have zero net exposure... right? This, together with, well, simple arithmetic will tend to debunk your novel accounting of the whole sordid affair. As a related matter, buying insurance from the transient heroin addict on the corner makes me 'hedged' than I'm a monkey's uncle. To paraphrase Seinfeld, anyone can sign a contract.

All of this is not to note what Minsky actually meant by hedged borrowing and it's role in the investment/credit cycle, but that is so manifestly far beyond your comprehension as to be unworthy of my time.

As to 6, no, this is clearly not what you meant, as made all the more obvious by your miraculously inane accounting of the financial crisis. Your reference is to the credit losses sustained by the agencies to date, no? This is incidental. If ever I get the vaguest sense that you care to engage in dialogue rather than rhetoric, I'll be more than happy to explain.

First things first: if you call me another name or otherwise insult me, I'm going to delete all your posts and refuse to allow new ones. I put up with more than my share of that in the CT thread, and remarked on none of it, but this is my place and I'm not putting up with it here. That includes presuming what I do and do not know, or what I do and do not believe.

Let's just drop #6. I'm not sure what you're driving at, and typing out my grand unified theory of the crisis would take two hours. I wasn't referring only to Frannie. I was referring to a host of public policy decisions -- from subsidies for home ownership to trade imbalances -- and private market behaviors -- from individuals to Lehman -- in multiple countries over many years. I suspect that we agree about most of this.

As for hedging... it does not mean "zero net exposure" if by that you mean full elimination of risk, since that's impossible (or else is simple arbitrage). It means "offset exposure to market direction". By, e.g., buying CDS from the most reputable insurance company to cover losses in your MBS portfolio.

(You call AIG a heroin addict on the street? The world's largest, best-rated insurance company? Turns out they were writing more CDS than they could handle. That was obvious in 2007. It wasn't in 2004.)

But yeah... the problems began in hedge-fund units within (and outside) the big banks. It started in Bear's "High-Grade" funds. And, yes, the hedge fund units were hedging.

That obviously leaves out the later liquidity problems and the fact that Lehman (and others) kept some bad (but securitized and highly-rated) loans on their books. It obviously leaves out the fact that everyone was levered up to their gills. But the whole reason this was such a big meltdown was because everyone thought they were being safe.

As for my understanding of Minsky... I've read FIH and bits and piece elsewhere, but I've never claimed expertise beyond that. And I'd still like you to cite the part you previously quoted. I Googled it and it looks like a reference to an essay dedicated to Paolo Labini, whoever that is, as well as Schumpeter. It appears to be written about the Depression, which would not make it prophetic. Before you lecture me on my understanding, I'd like you to clarify this point.

"2. You can think what you like about citizens' abdications; I just think people like low taxes and high spending. Sometimes, they like blowing up foreigners too."

In fact polls showed in 2001 that a plurality of citizens wanted the surplus set aside for payment of Medicare and SS benefits, rather than have it returned to the taxpayers. In addition they wanted the tax cuts repealed automatically if the surplus disappeared as a result of the tax cuts. http://people-press.org/2011/05/11/bush-lost-battle-over-the-surplus-but-won-tax-cut-war/

The Bush administration, in its battle to get the tax cuts, pushed the idea that the tax cuts would pay for themselves, despite the fact that this idea was universally opposed by economists.

http://www.spinsanity.org/columns/20030516.html

"On November 13, Bush said "[W]e have a deficit because tax revenues are down. Make no mistake about it, the tax relief package that we passed -- that should be permanent, by the way -- has helped the economy, and that the deficit would have been bigger without the tax relief package." Then, on January 7, he claimed his tax cut proposals "are essential for the long run... to lay the groundwork for future growth and future prosperity. That growth will bring the added benefit of higher revenues for the government -- revenues that will keep tax rates low..." Cheney made the same claim in a January 30 speech promoting the President's tax cut: "By leaving more money in the hands of the people who earn it, people who will spend and invest and save and add momentum to our recovery, we'll help create more jobs and ultimately increase tax revenues for the government." And Press Secretary Ari Fleischer was the most direct during a January 8 press briefing: "The entire package the President does believe will lead to growth, which will over time grow the economy, create additional revenues for the federal government and pay for itself.""

Besides, we know that the influential Grover Norquist chief of the Club for Growth, was pushing tax cuts to purposely create a crisis which would cut the size of the federal government.

Your reference to the Iraq War is also in correct. In Jan 2003, the public actually wanted inspections by the UN to be completed, and required a finding that there were WMD, before going to war.

The policies adopted by Bush on tax cuts and the Iraq invasion were actually opposed by the public, when the details of the policies are examined and compared with the wishes of the public.Krugman's contention about these two issues appears to be correct. The public was not behind what was actually done, contrary to your claim.

Your link very clearly shows that the public (60%) "approved of" the 2001 Bush tax cuts despite knowing that they would benefit some more than others (65%), especially the rich (79%). They wanted to link them to the deficit, which was why there was a 10-year window on the cuts. That's pretty strong support, and pretty high information too.

The Bush admin (and its partisan supporters) argued that the tax cuts would stimulate the economy in a recession. This is a standard Keynesian argument. They argued that this would lead to higher revenues. This was not a standard Keynesian argument (although Krugman has tilted towards it during the stimulus debates), was wrong, and was pointed out as being wrong at the time by many commenters. Politicians lie, obfuscate, and skew in order to suit their purposes. I agree. That doesn't change the fact that the public "approved of" tax cuts.

The "What to do with the surplus?" question is a bit misleading, since the surplus was expected to be $6tn over 10 years, while the tax cuts were expected to cost $1.6tn over the same period. Ie, there was room for paying for Social Security/Medicare and the tax cuts. As we've done, in fact, despite being in deficit for the whole decade. We even added Part D, and then PPACA.

If it *really* came down to one or the other, and the gov't cut Medicare to pay for tax cuts over the public's objections, then you'd have a point. But nothing that like has happened.

Again, you're trying to make me prove something that I've never asserted: that all of the public supported every bit of every piece of legislation.

On Iraq, here's a quote from the link you gave: "On the bottom line question of whether to use military force in Iraq, polls have continued to show majorities in favor of military action, with qualifications. But the size of the majority varies with the specific wording of the question."

The only polls that don't get majorities are "if your allies don't go with you" and "give the weapons inspectors more time". Inspectors had prevented from being in Iraq from 1998 to late-Nov.2002. It makes sense that in early-mid January (when the latest of the polls you link were taken) they'd want more time for inspectors. In late January, after all the polls in that list, Hans Blix said "Iraq appears not to have come to a genuine acceptance -- not even today -- of the disarmament, which was demanded of it and which it needs to carry out to win the confidence of the world and to live in peace" and had "misplaced" 1,000 tons of VX.

In March, about a week before the attack, the inspectors wrote to the UNSC that Iraq's cooperation with inspectors was "insufficient", and that they had not complied with their disarmament obligations under UNSC Resolution 1441. The inspectors did not found WMD, but did find numerous other weapons that violated UN restrictions.

As the invasion was about to start, over 50% supported an invasion. In other words, knowing that there was no UN approval, knowing that the inspectors were done and didn't find WMD, they still supported it. Immediately after the attack, over 60% approved. So a majority must have been satisfied with the level of allied support and the weapons inspection process. Would more have preferred UN-backing? I'm sure. Would some have preferred more inspections? No doubt. But even without those, a majority supported the war in March 2003, just as they had in every poll taken from Feb 2001 until then.

Look guys, there's a ton of political science research showing that politicians make policy along fairly narrow bounds in order to satisfy public opinion. These bounds are most narrow for high info/high salience issues (like tax policy and wars), and more broad for low info/low salience issues (like regulation). When politicians go against the public will in high info/high salience areas, they get punished. I've linked to some of this research. It's not that complicated.

"As the invasion was about to start, over 50% supported an invasion. In other words, knowing that there was no UN approval, knowing that the inspectors were done and didn't find WMD, they still supported it. Immediately after the attack, over 60% approved. So a majority must have been satisfied with the level of allied support and the weapons inspection process. Would more have preferred UN-backing? I'm sure. Would some have preferred more inspections? No doubt. But even without those, a majority supported the war in March 2003, just as they had in every poll taken from Feb 2001 until then."

The support is clearly a result of the speech Colin Powell, Bush's secretary of state gave at the UN on Feb. 5 2003, which made the case based on intelligence Powell was fed by the Defense Dept. and CIA . Powell said this was the lowest point in his life. He was suspicious of what he was told, but went along with it anyway like a good soldier.

Blix's report on March 7 was that Iraq had a mixed record on cooperation, and that verification would take months. It was not clearcut that the missiles were over range. Their range was too long if they were launched unarmed. This was more a technical violation than a real and threatening one. Iraq did deliver the missiles for destruction. Blix said that it would take months to do a complete verification under the best of circumstances, but said it could be done.

It seems to me, that the public supported the war because of Powell's speech, not because of the Blix's report on March 7, in which he actually asked for more time. It is a case of the elites misleading the public. In the case of Powell, he owns up, and regrets what he did, saying that he was suspicious and should have known better.

You have the cite right. Labini was an economist/economic historian that like Minsky studied under Schumpeter at Harvard. Not sure I follow your pique here. Nevertheless, I can assure you that the passage I've cited described at-the-time contemporary circumstances, not those of the Great Depression. The former was period Minsky described as 'financial capitalism', as opposed to the subsequently evolved ("retrograde") 'money manager capitalism' of the early 90s. That the Great Depression gets raised by Minsky a lot won't surprise people who follow him. He was after all a Keynesian (or at least, a post-Keynesian).

What is most prescient about that passage btw- aside from its clear echo of the Volker rule, (or rather of the concerns Volker sought to address), some 17 years before the fact- is its description of the contribution of secular dynamics to financial risk. People hear Minsky and they think 'stability is unstable' Ponzi borrowers and Minsky moments. The implications of work run considerably deeper than that, to the very core of the most important problems. Minsky strove to investigate the joint implications of the Schumpterian 'heartbeat' of the capitalist business cycle and its vaunted vulnerability as so well captured by Keynes (and Fischer), i.e. the duality of capitalism's nature with wealth creating resiliency on the one hand and serial wealth destroying manias and epic crashes on the other.

Back to the latest financial crisis, exposure and risk are separate things. The hedge instruments you refer to are universally zero sum games, often settled simply by cash payment from party A to B. Hence zero net exposure, hence it's not possible to make $800 billion in subprime exposure go away by throwing CDS in the mix. Neither was it possible to disappear the leveraged loans and CRE and repos and CPDOs and every other god forsaken thing Wall Street sold or used to engage in levered speculation back in the day (day of course ain't over yet). Someone will have been holding the bag. And while sixty some odd trillion of CDS and other derivative markets didn't reduce exposure an iota, they did manage to magnify risk. But that's not a topic I have time for.

This of course makes your claim that 'everyone was hedged' impossible, notwithstanding the myriad other issues with the framing (Minksy's reference was to real money, which included intermediaries only in their role as taking positions which by definition are not hedged). But we've spent enough time on this.

About Greenspan, his anyone-but-mea-culpas are by now the stuff of legend, and they always include the idea that 'it couldn't have been little old me, or our regulatory regime, because of the global housing bubble. QED'. As you know, this is the same point you made over at CT, and it is, not to get your hackles up, but sorry, abject nonsense. And one can start to get a sense of why that might be by taking the steps I recommended in my first post, involving the google and one easy to read flow chart from the kind folks at UBS.

By 6, you could say I meant primarily that the Geenspan Put was underwritten largely by agency balance sheets and that the vastly consequential nature of that policy is described by both Minskian institutional and credit cycle dynamics (the former being the subject of the cited essay, the latter described by the behaviors that market operators engage in when the perception of risk erodes, as it does for reasons of burgeoning profits and asset price increases during booms, but here also by consequence of epic moral hazard). Secondarily, Minsky traced the evolution nature of finance, flows and profits of the US economy to the invention of big bank and big government, and of the latter, the agencies were a non-trivial part.

Returning to the actual subject, my criticism of your arguments about public culpability for bad policy is both concurs the near length and breadth of the arguments that were mustered that suggest that the particular policies enacted were chosen at the discretion of the 'elite', and departs from it regarding the existence of public culpability (in which sense, you do get the government you deserve). Neither do I think the former is difficult to show, when you consider, just for one, the fact that lobbyists literally write our laws (examples much too copious to cite here). And for the other the ostensible mechanism of oversight I alluded to in my first post, which is woefully inadequate to the task.

Note that this doesn't mean I posit a single monolithic elite, but rather one whose various constituencies don't duke it out with the powers that be for who can raise the most quid pro quo payola, and who ends up with the slickest pr firms, consultancies and advertising and ultimately whose demagoguery is the most effectively manipulative and far reaching, (note again the hat tip to Robert Penn Warren).

What it means is that I posit that corruption has absolutely blossomed in this country over the past few decades, most notably the last, as the electorate has become increasingly passive players in the oversight of their elected leadership (see, e.g. the contrast between reception of Watergate received with the discovery that the Bush administration knowingly manipulated the case for war).

Apropos and returning to the woeful mechanism that is an election (see, e.g. Afghanistan), the elite can never be trusted to police the elite, ostensible ideological divisions notwithstanding, and that low information swing voters who vote on the basis of the availability of jobs and the extent to which their jingoistic vices are edified will never be able to do so either. The latter in fact instills perverse incentives that the amoral elite no longer have any qualms about capitalizing on, namely that an out-power party can sabotage the nation and gain electorally by consequence (!!!!!). How's that for voting your interest???

That is what Bowling Alone has to do with it, that is the link I'm drawing to more scholarly work and empirical data mustered there and in 'Civic traditions in modern Italy'. You've rejected all this out of hand as absurd, which it self-evidently as not, and then turned around and asked me to start from the beginning about Minsky and the financial crisis. These are not consistent standards, and it would be nice to hear you:

a) acknowledge the legitimacy of the arguments I've made, for what it is whether you agree with it or notor b) provide a detailed explanation why you believe them to be nonsensical and unworthy of your time

I hardly think that is too much to ask.

PS Please reread my original post vis a vis Kansas. The only thing I ever endorsed about it was the idea that the electorate can be manipulated to vote against their interest. It is superfluous otherwise, and nearly so in the original context, and I plan on ignoring any further comment about it.

PPS AIG was definitely no better credit than your average transient heroin addict, nor were the monolines, so yeah, that was the point.

From Majorajam: About Greenspan, his anyone-but-mea-culpas are by now the stuff of legend, and they always include the idea that 'it couldn't have been little old me, or our regulatory regime, because of the global housing bubble. QED'. As you know, this is the same point you made over at CT, and it is, not to get your hackles up, but sorry, abject nonsense. And one can start to get a sense of why that might be by taking the steps I recommended in my first post, involving the google and one easy to read flow chart from the kind folks at UBS.

By 6, you could say I meant primarily that the Geenspan Put was underwritten largely by agency balance sheets and that the vastly consequential nature of that policy is described by both Minskian institutional and credit cycle dynamics (the former being the subject of the cited essay, the latter described by the behaviors that market operators engage in when the perception of risk erodes, as it does for reasons of burgeoning profits and asset price increases during booms, but here also by consequence of epic moral hazard). Secondarily, Minsky traced the evolution nature of finance, flows and profits of the US economy to the invention of big bank and big government, and of the latter, the agencies were a non-trivial part.

Returning to the actual subject, my criticism of your arguments about public culpability for bad policy is both concurs the near length and breadth of the arguments that were mustered that suggest that the particular policies enacted were chosen at the discretion of the 'elite', and departs from it regarding the existence of public culpability (in which sense, you do get the government you deserve). Neither do I think the former is difficult to show, when you consider, just for one, the fact that lobbyists literally write our laws (examples much too copious to cite here). And for the other the ostensible mechanism of oversight I alluded to in my first post, which is woefully inadequate to the task.

Note that this doesn't mean I posit a single monolithic elite, but rather one whose various constituencies don't duke it out with the powers that be for who can raise the most quid pro quo payola, and who ends up with the slickest pr firms, consultancies and advertising and ultimately whose demagoguery is the most effectively manipulative and far reaching, (note again the hat tip to Robert Penn Warren).

What it means is that I posit that corruption has absolutely blossomed in this country over the past few decades, most notably the last, as the electorate has become increasingly passive players in the oversight of their elected leadership (see, e.g. the contrast between reception of Watergate received with the discovery that the Bush administration knowingly manipulated the case for war).

Looks like the spam filter caught some of your comments. I've posted them; not sure if they made it in the right order. There appears to be duplicates as well, but I'll let you sort through that if you like.

1. I'm not at all trying to slag on Minsky here, and from what I know I agree with you that his most useful characteristic is in the "dual nature of capitalism" vein. And, like Kindleberger, that is helpful for understanding crises generally. As for understanding how we got the crisis we got when we got it... it only takes us so far. The important thing, for me, about Minsky was that he was writing against EMH back in the '80s and '90s and describing in broad strokes some ways in which financial instability can occur. It's a worthwhile extension of the Schumpeterian/Keynesian project, and it's useful for that. I find it's less useful for understanding the precise mechanisms operating in this crisis, which I think were political as much as financial, but maybe I've just not read enough of it.

2. Re: exposure/risk: "Someone will have been holding the bag". Yes of course. That's how hedge funds work. AIG was the one holding the bag.

3. I agree about Greenspan, and never said otherwise. He played a big role in creating the macro imbalances that led to the bubble. But it wasn't just him. It was also savers in EMs, activist fiscal policies encouraging debt-accumulation and home ownership, etc. Greenspan played a big role, but he wasn't the only actor. I'm not sure that regulation was the biggest part of that, but it may have exacerbated what was already going on.

I think we agree on #6.

Has corruption gone up? I don't know. I think it's probably impossible to know. It seems like everyone thinks that corruption is higher than it used to be, all the time. Corruption tends to go down when populations become richer and more informed, but that doesn't say anything about this specific circumstance.

- "an out-power party can sabotage the nation and gain electorally by consequence (!!!!!). How's that for voting your interest???"

This is always a problem with democracies, which has been a big part of my point all along. Moreover, "sabotage" implies some public interest, which I think is very hard to define or locate.

- Re: Kansas and voting against ones' interest, the book been very thoroughly debunked by political scientists that carefully examine public opinion. Andrew Gelman did very extensive empirical work in Rich State, Poor State, Red State, Blue State. Larry Bartels knocked down Kansas as well (http://www.princeton.edu/~bartels/kansas.pdf). The mass public behaves similarly, as *The Macro Polity* shows.

Not sure if that covers everything, but I'm getting pretty tired of this discussion so it'll have to do for now.

Fair enough, and I can appreciate your fatigue here. I will leave well enough alone for the most part. As to whether we are more corrupt than we once were, I wonder if you agree that Roman governance was more corrupt in its empire's latter stages than during its formation? Or substitute the word British for Roman? Or Athenian? Spanish? Mongol? Or ask that question of any historical power you so choose. Because I think this and copious other data points have implications.

In particular, while I agree with you that corruption and wealth are inversely correlated, I read the record as clearly evidencing the opposite causality. This would mean, amongst several other things (such as that it's possible for time frames relevant to human lives that corruption is always getting worse), that our country's blossoming corruption* can be viewed as one grand experiment in how poor we can make our formerly wealthy selves how quickly.

To my mind, the results of that experiment will become very clear over the next decade, as this country comes to grips with the extent to which we engaged in an orgy of seed corn eating at the close of the 20th and early 21st centuries, and how transformed will be our nation and lifestyles by consequence. I suspect very few people realize just how bad it is poised to become.

In any case, it strikes me that this time will be a good opportunity to reevaluate the idea that a woefully uninformed disengaged electorate has any chance to police the myopic, amoral rent seeking bunch of hoodlums with their fingers on all the levers of power.

* Just off the top of my head, and in no particular order, how many billions disappeared in Iraq? How much was that investigated? Or does the average person have any clue? What arrests and reforms were made by consequence? What happened in the last administration's department of the interior? Was there ever a time that the justice department was employed for political ends before the last decade? How many people went to jail for manipulating the state of California's power market to the tune of billions? For manipulating the ethanol market? And how many have gone to jail for their role in the financial crisis? How many meaningful reforms have been made by consequence? And on and on and on ad nauseum.

I honestly have no idea whether the political system is more corrupt now than it was before, much less how corruption in Rome, Britain, Athens, or Mongolia developed over time.

My gut opinion is that corruption is lower now in the US than it used to be. You've brought up R. Penn Warren a couple of times... compare what Huey Long got away to Rod Blago. Does Halliburton collect rents? Of course. But their influence pales in comparison to the influence of the United Fruit Company in Latin America during the 1950s-1960s. (The influence of the East India Company waned until its collapse in the 1850s.) Do interest groups have access to policy makers? Yes, but what else is new? The younger Mayor Daley had disproportionate influence in Chicago politics, but not like his father did. Organized crime probably has less influence that at any point in US history. Hell, in the US insider trading used to be *legal*.

Obviously these types of comparisons are hard, so I'm not really advancing any argument except that it's not obvious that corruption is worse now.